The crypto world is made up of two kinds of people: investors and traders. Investors hold onto their coins. They buy now and hope that in year or two or maybe more, the value of the currency will have risen high enough to have given them a handsome profit. If the price drops a few percentage points in the meantime it doesn't matter. As long as the long-term trajectory is upwards they'll make money regardless of the day-to-day volatility.

Traders, though, try to make money from that volatility. They follow the movements, look for patterns and try to make sure that they buy low and sell high. They might hold onto their coins for no more than a few hours, just long enough to ride from a trough to a peak or, if they're shorting, back again. The decisions they make about when to buy and when to sell are based on "technical analysis."

It's the sort of thing that every adult with wealth should know. But no one ever teaches it to us so we're often left pretending that we understand how speculators play the market when in fact, apart from "buy low, sell high," we have no idea how to turn the market's movements into income.

This is what you need to know about technical analysis.

First, technical analysis is both an art and a science. Traders look for patterns in the movement of an asset--a stock or a currency, for example--so that they can see trends that predict future movements. They might see, for example, that an asset never rises more than a certain number of points before the price starts to fall and never falls more than a certain number of points before it rises again. If they can identify that pattern, they'll always know when to buy and sell.

Second, it's not that simple. The assumption behind technical analysis is that assets behave in predictable ways. But the world isn't entirely predictable. Patterns rarely repeat exactly and they often break. That's why traders also look for longer term patterns such as a series of peaks and troughs that show a general trend or which suggest a change of direction. The result is a confusing mixture of different ways of drawing lines on graphs to reveal different kinds of patterns. Day traders tend to pick a pattern they like and stick to it but they could just as easily have chosen a different form of technical analysis.

Third, it's risky. The profits on small movements are usually small, and they're even smaller once you've paid the broker's fee. To make money with short term trades, speculators use leverage. They use their stake as collateral to borrow money to trade. If the trade works, they can pay back the stake with interest and keep a larger profit. But if they lose, they lose more funds too. Traders who use leverage can find that they lose their entire stake.

While plenty of courses are available that promise to teach day trading using technical analysis, learning how to profit at a rate close to reliability takes time, as long as a couple of years. And even then, a talented trader can still expect to lose a good 40 percent of their trades--if they're good. Most short-term traders aren't good.

That's why the most important thing to know about technical analysis is that it's not for everyone. Cryptocurrencies might have the volatility that technical analysis needs but it's still high risk stuff that requires plenty of knowledge and lots of courage. Investors? We might have to wait longer for our profits but if you believe in cryptocurrencies, it's a strategy that looks more certain.

Published on: Nov 1, 2018
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